Self-employed? Here’s a pension for you, too

Lawyer Murray Gottheil, a partner in Pallett Valo in Misissauga, has signed up for a PPP – a personal pension plan, a relatively new product designed for incorporated professionals and entrepreneurs.

J.P. MOCZULSKI/The Globe and Mail

MARJO JOHNE

Special to The Globe and Mail

Published January 29, 2015Updated March 25, 2017

After years of contributing faithfully to an RRSP, Murray Gottheil decided last October to take another approach to saving for his retirement.

Mr. Gottheil, a partner in the Toronto law firm Pallett Valo LLP, set up a personal pension plan, a relatively new product that some financial experts say may be the best retirement savings option – and alternative to registered retirement savings plans – for incorporated professionals and entrepreneurs. Mr. Gottheil invested about $28,000 in his new PPP, an amount that's almost $4,000 more than the RRSP contribution limit for 2014.

"In my mind, it's something that every business owner or incorporated professional – such as a dentist, doctor or lawyer – should be looking at," says Mike Vanderburgh, managing director at Newport Private Wealth, a wealth management firm in Toronto that recently began offering PPPs. "There are many benefits associated with a personal pension plan."

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Introduced two years ago by Toronto's Integris Pension Management Corp., a PPP is a registered pension plan available to professionals or entrepreneurs with incorporated companies. The latter group includes owners of franchise operations such as food or retail chains.

The PPP bears some similarities to another pension product, the individual pension plan. Both the PPP and IPP are structured so they are owned or sponsored by the incorporated business entity, with the entrepreneur or professional named as plan member.

"PPPs and IPPs provide a tax-efficient way to take money out of the business," says Greg Kennedy, a senior wealth consultant at Meridian Credit Union in Toronto. "The incorporated company makes the contribution, creating a tax deduction and lowering its corporate taxes."

With a PPP or IPP, management fees and all other costs associated with the plan – such as administration fees – are tax-deductible for the incorporated business, Mr. Kennedy notes. This tax advantage can add up over the years.

But where an IPP requires the incorporated individual to oversee the plan and retain the services of an actuary, investment manager and funds custodian, a PPP comes with these services already built in, plus fiduciary oversight. The PPP also offers something an IPP does not: the flexibility of switching between defined benefit and defined contribution – an important consideration for business owners who face revenue fluctuations.

(A defined benefit plan, which is what an IPP provides, guarantees a predetermined monthly pension amount upon retirement, regardless of how the market performs. With defined contribution, the amount of the retirement income isn't known in advance but depends on factors such as how much money is invested in the plan, interest rates and investment returns.)

But how does a PPP stack up against an RRSP? Jean-Pierre Laporte, chief executive officer of Integris, points to the most significant PPP advantage over an RRSP: the ability to put away more money.

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An individual's RRSP contribution room is based on 18 per cent of earned income, up to a maximum dollar amount, which the CRA has set this year at $24,930. In a defined-contribution PPP, the allowable contribution is also 18 per cent of income, but with a higher cap: For 2015, it's $25,370, or $440 more than the RRSP limit.

In a defined-benefit PPP, maximum contributions are determined by actuarial valuations based on age and income, and as you age the cap moves higher. For incorporated individuals between the ages of 18 and 39, the defined-benefit limits are lower than the RRSP contribution limit, and in their case it makes sense to stay with a defined-contribution PPP until they reach an age where defined benefit contribution limits are higher.

But for those age 40 and older, a defined-benefit PPP allows contributions that are higher than the RRSP limit as well as higher than the defined-contribution PPP limit, says Mr. Laporte. For example, based on this year's actuarial valuations, a 40-year-old incorporated individual can put away about $25,642 into a defined-benefit PPP. That's $712 more than this year's RRSP limit.

Move 10 years up the age ladder and that defined-benefit PPP limit goes up to almost $31,000, or more than $6,000 higher than the RRSP ceiling. For a 60-year-old, the allowable contribution is $12,400 higher than the RRSP limit.

As is the case with an RRSP, money put into a PPP triggers a tax refund for the contributor and grows tax-sheltered inside the plan. For incorporated individuals who want to save more for retirement, the PPP is a great solution, says Mr. Laporte.

"At any age, a PPP gives you a higher contribution room than an RRSP," says Mr. Laporte, who worked as a pension lawyer with a Toronto law firm before he founded Integris. "You're always better off with a PPP than with an RRSP."

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Mr. Laporte also notes that money in a PPP is shielded from creditors while RRSP savings in general are not.

Mark Goodfield, a partner in the accounting firm BDO Canada, says the ability to increase contributions to make up for lower-than-expected investment returns is another reason to choose a PPP over an RRSP.

"In pension legislation, there's a required level of return, and if the actual return is below this prescribed amount, then you're able to increase your contribution to your PPP to get you up to that number," he says. "If you have an RRSP and your oil stocks don't do well, you can't just pad your portfolio if you don't have the contribution room."

Professionals and entrepreneurs who were incorporated before they set up a PPP can further boost their retirement savings by making a past-service contribution, which they're allowed to do for each year the business has been incorporated since 1991.

"It could add up to a significant amount," Mr. Goodfield says.

Mr. Laporte says a defined-benefit PPP also allows plan members to purchase ancillary benefits above and beyond their basic pension. For example, entrepreneurs or professionals who want to retire early without reducing their annual pension can add a benefit called early unreduced pension, or a CPP bridge that will provide a temporary pension until Canada Pension Plan benefits kick in.

"You can't do that with an RRSP," Mr. Laporte says. "These ancillary benefits are all fully tax deductible for the corporation, so you get a tax refund and you get more money to retire on."

While those with a defined-benefit PPP can also put money into an RRSP, the maximum annual contribution for the latter is reduced to only $600 the year after the PPP is set up. Mr. Gottheil, who plans to maintain his RRSP while putting most of his retirement savings into a personal pension plan, says he made the right move by signing up for a PPP.